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FONTERRA CAN generate cash from within its business to finance growth but needs a stable capital base to do this, says chief executive Theo Spierings. He says TAF (trading among farmers) will ensure a strong capital base for Fonterra.
Briefing farmers on the co-op's strategy refresh last week, he made it clear Fonterra will not be asking farmers for cash to fuel growth. Instead he wants the co-op's New Zealand, Australia and Middle East businesses to generate more cash.
Spierings also hinted at downsizing Fonterra's US and Europe business saying their relevance had "gone down".
"We're not saying we won't be in the US and Europe but will look at the cost and cash delivery of business units," he says.
The co-op's growth strategy will target China, south-east Asia (ASEAN) and Latin America. Spierings will later this month present his growth strategy to Fonterra's board for approval.
The co-op is expected to release more details at its half-year results announcement on March 29.
Last week Spierings, co-op chairman Henry van der Heyden and Fonterra Shareholders Council chairman Simon Couper briefed farmers on the strategy refresh in Christchurch, New Plymouth and Hamilton. The Hamilton meeting was live on a Sky TV channel and farmers were allowed to phone in with questions.
Spierings explained the global dairy outlook and opportunities for Fonterra. For Fonterra, milk volume and growth in value are crucial. The long-term outlook for dairy product demand is bullish. Global demand is forecast to grow by 160 billion litres by 2020 while New Zealand's production is expected to grow by 5b L.
Spierings says the question for Fonterra is whether it will only focus on New Zealand milk or look at overseas milk pools. He warns Fonterra's market power in dairy will diminish if it's unable to obtain more milk to meet global demand.
The strongest demand growth is being recorded in emerging markets like India and China. Demand is flattening out in the US and Europe. Fonterra, which sends 40% of its milk to Asia, is well placed to capitalise on growth opportunities, he says.
Spierings wants Fonterra to use both its brands and ingredients businesses to target four key platforms; nutrition for mother and child as Asia's population grows, ageing population in Japan and China, tackling obesity and convenience foods.
At the same time Fonterra needs to protect its market share in China, south-east Asia and Latin America, regions that take 50% of its milk.
"If we don't protect our market share, we might lose our position. If that happens 50% of our
milk that goes to this region will end up on GDT and that will make a huge impact on the milk price," he told farmers.
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